Ending the individual tax cuts President Donald J. Trump signed into law in 2017 would have a negligible effect on the American economy over the next decade, the nonpartisan Congressional Budget Office found in a projection that could deflate Republican promises to supercharge the economy with tax cuts next year.
The budget office’s analysis comes as Republicans, who will take control of Washington in January, are weighing the fate of the broad tax cut they passed in 2017. That law slashed marginal tax rates across income groups, expanded the standard deduction and made the child tax credit more generous. But many of the cuts expire at the end of next year, and lawmakers are now figuring out how to extend them.
Allowing the tax cuts to end as currently scheduled would essentially raise taxes on many Americans, with conflicting economic consequences. The budget office said higher taxes would prompt Americans to work less, slowing economic growth.
But higher taxes also generate more revenue for the government, which would allow the United States to rely less on borrowed money. Reduced government borrowing would over time support economic growth, the budget office said, by keeping interest rates lower and freeing up investors to direct more of their money into business ventures rather than government bonds.
Overall, the two effects from ending the tax cuts — lower growth because people work less and more economic activity because of a smaller debt load — would basically cancel each other out over a decade. The American economy, as measured by gross domestic product, would actually be slightly larger in 2034 if the tax cuts end, the budget office said.
Still, even if letting taxes go up on many Americans wouldn’t harm the economy, Republicans are unlikely to allow that to happen. Republicans made the 2017 tax cuts temporary to streamline their passage and contain the price tag at that time, though they hoped Congress would later continue the tax cuts. Lawmakers in both parties fear raising taxes on their voters, a dynamic that has helped fuel a growing deficit in recent decades.
The Congressional Budget Office’s finding focused only on taxes that individuals pay, the most expensive of the tax measures before lawmakers. Academics and budget experts generally believe tax cuts for businesses do more to boost new investments and stimulate the economy. The 2017 law cut the corporate tax rate to 21 percent from 35 percent, a change that is not scheduled to expire, among other business cuts.
The analysis also only looked at measures now in law. Mr. Trump has proposed a host of additional tax cuts, including not taxing tips, that Republicans are hoping to pass next year.
Attempting to move a huge tax package will push the typically quiet work of budget and tax analysts at the Congressional Budget Office and Joint Committee on Taxation into the spotlight. Republicans are already questioning how those offices measure the federal budget as they grapple with the roughly $4 trillion cost of preserving the 2017 tax cuts.
Senator Michael D. Crapo of Idaho, the top Republican on the Senate Finance Committee, has argued that lawmakers should ignore the budget office’s price tag of keeping existing tax cuts in place. Other Republicans have pointed to higher tax receipts in recent years than the budget office projected to suggest that 2017 tax cuts did, in fact pay for themselves.
In a blog post on Wednesday, Phillip L. Swagel, who heads the budget office, said the recent burst of inflation, which raised nominal earnings for people and businesses, is the primary driver of higher tax revenue in recent years. He also noted the difficult of determining the exact economic effects of the sweeping 2017 legislation, a problem that has bedeviled many economists seeking to understand them.
“Separating the tax-induced effects from the effects of unanticipated events — most notably, the coronavirus pandemic — is challenging,” Mr. Swagel wrote.
Even with cloudy data, Republicans are planning to argue that the 2017 tax cut is central to the success of the American economy. While the importance of the tax cut may help unify them, Republicans, who will have a bare majority in the House, are still trying to figure out how quickly they should try to pass a tax bill next year — and how much money they are willing to dedicate to lowering taxes.
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